Member-only story
Why Venture-Backed Startups Shouldn’t Take SBA Loans
If you’re not shut out of the credit markets, leave it for those who really need it.
There has been a lot of discussion about whether startups qualify for forgivable loans under the Paycheck Protection Program (part of the CARES Act) administered by the U.S. Small Business Administration. I don’t want to rehash the arcana of affiliation rules here. Instead, I’ll make a totally different point: There is a money grab going on right now by some venture-backed startups that this program absolutely should exclude.
Let me start by writing about the kind of business I believe this program is spot-on for: the local construction company that has to stop all projects, or the barbershop that has zero business right now. These businesses tend to be low margin and operate on very little cash (maybe two to four weeks’ worth). Their revenues have gone to zero. They don’t have equity investors and are largely shut out from the credit markets. Their only alternative is bankruptcy.
By contrast, many venture-backed companies have many months or maybe even more than a year of burn sitting in their bank accounts. Their investors are often deep-pocketed funds that should be well reserved for follow-on investments. They can get sophisticated financial advice and access the venture debt market (admittedly not right now, but probably again in a couple months). Many of these businesses operate in the digital realm and have seen limited impact on revenues — some have even seen their revenues explode.
We are in a crisis where true leadership means thinking beyond one’s own concerns.
Just to be clear: I think some venture-backed companies have a legitimate claim that they should be part of the Paycheck Protection Program. For example, we have some companies in our portfolio for which revenues have collapsed. But I fear that many more will apply, and with a program that’s first-come, first-served, they will squeeze out the small businesses for which this program is their only lifeline.
I have been an entrepreneur and understand the worry that maybe things look okay now, but what if my company falls off a cliff and I haven’t taken this money? These are legitimate considerations, but so is the realization that millions of small businesses already have fallen off a cliff and need those funds to survive. In this context, it might be useful to keep in mind that there will be a public record of every company that avails itself of the Paycheck Protection Program.
So, I urge everyone who is running a venture-backed company with a lot of money in the bank and limited Covid-19 impact to think twice about applying for the Paycheck Protection Program. In the end, this is obviously a difficult decision, but we are in a crisis where true leadership means thinking beyond one’s own concerns.
This was originally published on Continuations.com.
